Stanley and Fischer - Tomer Appelbaum - Oct 10, 2010
Stanley Fischer and Yuval Steinitz in Jerusalem. Photo by Tomer Appelbaum
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WASHINGTON - The United States led a drive yesterday for the International Monetary Fund to take a more assertive role in refereeing disputes over currencies and ensuring that national economic policies don't disrupt global growth.

Strengthening the IMF's hand could put global weight behind the United States' effort to persuade China to allow faster appreciation of its currency. But the proposal appeared to be gaining little support.

Global economic leaders, including Finance Minister Yuval Steinitz and Bank of Israel Governor Stanley Fischer, are currently in Washington for the annual autumn IMF and World Bank meeting.

"I'm returning to Israel with a bad feeling," said Steinitz yesterday. "The feeling in the United States, Europe and the IMF is that the world needs a few more years to treat the global financial crisis," he said.

"If the problems continue, obviously it's going to affect us too," he said.

One of the matters under discussion in Washington is Israel's battle to keep the shekel from appreciating against the dollar. Israel's central bank has been soaking up dollars since 2008, in an effort to meet the growing demand for the shekel and to soak up the influx of dollars.

Israel's battle against the dollar exchange rate came to a head last Thursday, when Fischer was woken in the middle of the night in Washington as the shekel dropped below NIS 3.60 per dollar in morning trading in Israel. The bank bought up a whopping $650 million on Thursday.

"The dollar purchases that the Bank of Israel has been making for two and a half years now have prevented much worse damage to the shekel exchange rate and the economy as a whole," said Barry Topf, Director of the Bank of Israel Foreign Currency Department. Topf is responsible for the foreign exchange transactions at the bank.

"The public needs to understand that the bank is working to moderate the negative influences of the increasing exchange rate, but doesn't think it can change global trends," he told TheMarker.

Currencies in general have become a hot-button issue as countries seek to solidify a shaky economic recovery, particularly in advanced economies. Beyond Israel, other countries are also working to keep their currencies from appreciating.

The so-called currency war was the central topic of discussion at the IMF meeting. Brazilian Finance Minister Guido Mantega is the person responsible for coming up with the actual term.

Liquidity-boosting efforts by the Federal Reserve have led to a weaker dollar, while rigid foreign exchange policies in other countries, notably China, have left emerging markets bearing the brunt of currency adjustment as investors pile into higher-yielding assets.

"The IMF must strengthen its surveillance of exchange-rate policies and reserve accumulation practices," U.S. Treasury Secretary Timothy Geithner said in a statement to the IMF.

The IMF already conducts annual economic reviews of most of its 187 member countries and reports on a range of issues, including exchange rate moves and monetary and fiscal policy.

It is considering giving more heft to its economic surveillance of the five key powers - the United States, euro zone, China, Japan and Britain - by issuing their reports simultaneously to better gauge whether their policies might have unintended consequences for other countries.

But the United Kingdom poured cold water on the new approach. "It sounds like everyone just doing their [regular IMF reviews ] at the same time," a British official said.

China said currency tensions should resolve over time as global growth strengthens.

The Group of 20 rich and emerging nations have already tasked the fund with evaluating whether national policies mesh. But some leaders want to see both the IMF and G20 raise their voices even louder when they spot potential problems, whether in currency alignments or other policies.

Christine Lagarde, economy minister for France, which chairs the G20 next year, said the increasing frequency of financial crises shows weaknesses in coordination on economic policies, especially exchange rates.

Flight into emerging markets

Investors caught in the middle of simmering global currency tensions are finding little option but to grab anything as low rates and a falling dollar feed into a rush into high-yield assets.

Key finance chiefs meeting in Washington and Seoul over the coming weeks will try to soothe tensions, intensified by Japan's currency intervention, expectations of more money printing in the United States and Brazil's measures to slow capital inflows.

But such flows into emerging markets are part of investors fundamentally rebalancing their portfolio, away from low-growth advanced economies into the emerging world, which some estimate will generate 85 percent of global growth in the next decade.

It has become almost indiscriminate. It used to be Growth At the Right Price. Now it's almost Growth At Any Price. We're moving from emerging markets as an option to a permanent feature in asset allocation portfolio," said Michael Power, global strategist at Investec Asset Management.

"There's a massive credit upgrade cycle in emerging markets. That means capital gains. Advanced economies are riskier than emerging markets. That hasn't happened in my lifetime," said Ashok Shah, chief investment officer of London and Capital.

As flows into the emerging world snowball, some investors are starting to flag risks surrounding the boom with currency politics over the next few weeks providing some caution.

Even with key currency talks and some measures to counter inflows, an investor stampede into emerging markets is showing no signs of abating. Fund tracker EPFR Global said flows into emerging equities hit a 33-month high of $6 billion in the past week.